Essays in macroeconomics and housing

Aurelio Duarte, Joao Bernardo Neto

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Description

Title

Essays in macroeconomics and housing

Author(s)

Aurelio Duarte, Joao Bernardo Neto

Issue Date

2016-04-21

Director of Research (if dissertation) or Advisor (if thesis)

Bernhardt, Dan

Doctoral Committee Chair(s)

Bernhardt, Dan

Committee Member(s)

• Parente, Stephen
• Dias, Daniel A.
• Shin, Minchul

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Macroeconomics
• Housing
• Monetary Policy
• Structural Transformation
• Structural vector autoregression (SVAR)
• Factor augmented vector autoregressive (FAVAR)
• Taylor Rule
• Tenure Choice
• Rents
• Housing Prices
• Services
• Labor Productivity
• Inflation
• Consumer price index (CPI)

Abstract

In the first chapter, we unveil a feedback loop between monetary policy, housing tenure choice (own vs rent) and measured inflation and quantify its consequences. This feedback loop is explained in three parts: i) Housing rents respond positively to contractionary monetary policy shocks; ii) This effect of interest rates on housing rents gives rise to an important and systematic inflation mismeasurement problem because, directly and indirectly, housing rents weigh approximately 30\% in the CPI and 13\% in the PCE; iii) When interest rates are set according to a Taylor rule, the systematic mismeasurement of inflation gives rise to a feedback loop by which the monetary authority keeps setting interest rates too high (low) because inflation is apparently too high (low). To rationalize i) and quantify the importance of iii) we propose a standard New Keynesian model augmented with an endogenous housing tenure choice mechanism. Using a calibrated version of the model, we do a counterfactual exercise and estimate that, when the monetary authority targets the implied consumer price index net of housing rents instead of the implied consumer price index, the loss function of monetary policy is 14.5\% lower and the welfare in terms of consumption equivalent variation is 0.9\% higher. Finally, analysing the same alternative scenario for the 1983-2006 US experience, we find that the standard deviation of housing prices and nominal inflation would have been 24.8\% and 19.9\% lower, respectively. In the second chapter, we provide an alternative explanation for the price puzzle (Sims 1992) based on the effect of monetary policy on housing tenure choice and the weight of the shelter component in overall CPI. In the presence of nominal or financial frictions, when interest rates increase, the real cost of owning a house increases, and this increase may make some people prefer to rent instead of buying. This change in consumption behavior increases the price of rents relative to other goods. Starting in 1983, homeownership costs are based on a measure of implied owner equivalent rent, which is calculated using observed house rents. This change implies that, directly and indirectly, prices in the rental market almost entirely command the shelter component of CPI, which weighs around 30\%\ in the overall index. When we take these two pieces into account and use CPI net of shelter services as a measure of inflation, we obtain impulse responses of prices to a monetary contraction shock more in line with what is predicted by theory. In addition, our results also suggest that inflation is much less persistent than what is implied by analyses using a measure of inflation that includes shelter services. Our results pass a long list of robustness check exercises and compare well against other explanations of the price puzzle. Finally in the third chapter, we investigate the observed differences in the service sector's labor productivity between Europe and the US. The objective of this chapter is to identify factors that can explain such differences. Our approach to identify these factors is two-folded. First, we break down the service sector and extend a standard structural transformation model of Duarte and Restuccia (2010) to investigate how the structural transformation within the service sector affects the labor productivity of the service sector. We show that a compositional analyses of the service sector reveals that the differences in the service sector's productivity between different Europe and the US are the result of differences in the labor productivity of trade, food and accommodation, transportation, storage and communication. Second, we explore the EU KLEMS data set to empirically investigate if differences in labor market regulation help explain the differences in the service sector's productivity. Our preliminary results suggest that labor market regulation is negatively correlated with service labor productivity.

Graduation Semester

2016-05

Type of Resource

text

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Copyright and License Information

Copyright 2016 Joao B. Duarte

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